Question
The current market-to-book (M/B) and forward price-earnings (P/E) ratios for two companies, X Ltd. and Y Inc., are presented below. The two companies are direct
The current market-to-book (M/B) and forward price-earnings (P/E) ratios for two companies, X Ltd. and Y Inc., are presented below. The two companies are direct competitors in the same industry sector, produce the same product and sell it to the same set of customers. They have the same scale of operation and the same capital structure. The average values of the market-to-book (M/B) and forward price-earnings (P/E) ratios for the industry sector are also presented below.
X Ltd. Y Inc. Industry Mean
Price-Earnings (P/E) ratio 9.00 2.50 5.00
Market-to-Book (M/B) ratio 1.25 0.75 3.90
Based on this information, which of the following statements MUST be TRUE?
| 1. | The market believes that X Ltd.s abnormal earnings (residual income) will increase more than the abnormal earnings (residual income) of Y Inc. | |
| 2. | The market believes that the abnormal earnings (residual income) of both X Ltd. and Y Inc. are negative because each has a market-to-book (M/B) ratio that is well below the industry mean value | |
| 3. | The market believes that X Ltd.s earnings (NPAT) will increase more than the earnings (NPAT) of Y Inc. | |
| 4. | The market believes that the two companies have the same risk since they have the same capital structure |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Smith and Roberson Business Law
Authors: Richard A. Mann, Barry S. Roberts
15th Edition
1285141903, 1285141903, 9781285141909, 978-0538473637
